fbpx
What is Investing?

It is the allocation of funds to assets or committing capital to a project or business with a profit-generating expectation. [2] Simply, it is an acquired asset with the goal of generating appreciation in the value of that asset. In finance, an investment is a monetary asset that is bought with the sole purpose of creating profit or value. [3]

Investment

Understanding investment

The act of putting money to expand a project or to buy an asset to create future income and increase in value over time. In financial terms, this involves purchasing stocks, bonds, real estate and mutual funds among other investments. [3]

Risk and return go hand-in-hand

Investment is concerned with future growth, there is risk associated with the investment as that particular investment might fall short or may not provide gains which were anticipated. 

For example, suppose you invest in a firm with a profit-making goal, but the company ends up being bankrupt. This is the main differentiating factor between saving and investing. [3]

Further, Risk and return are complementary to each other. Low-risk means lower expected return, while high-risk investments generally have higher expected returns. For instance, investment products like bonds, debentures, Certificates of Deposits are considered low-risk and low expected return securities. However, investments like stocks are riskier products that offer higher returns. Additionally, securities like commodities and derivatives are the riskiest among other investments. Investors like to invest in dull options like property and real estate whereas some investors with a taste for mysterious products invest in antiques and fine art. [2]

Return from different investments

The returns generated by assets can vary and is completely dependent on the type of asset. For example, some stocks pay regular dividends along with price appreciation. Whereas some stocks do not pay any dividends and the return to investors is solely based on capital gains. Further, investment opportunities like bonds pay quarterly or semi-annual interest. 

Capital appreciation is also a major source of growth. Hence, it is necessary to assess the total return as a sum of income and capital gain. [2]

Types of Investments

Stocks:

An investor who invests in a company’s stocks becomes a partial owner of the company up to the value of the investment. Owners of any company become shareholders of that particular company. They participate in the company’s growth and success through appreciation of stock prices and regular dividends paid through the company’s profits. [2]

Bonds:

They are debt instruments that are issued by governments, municipalities, and corporations. Investing in bonds means that you have a share of the issuing entities’ debt and it is obligated to pay you periodic interest payments along with the face value of the bonds when it matures. [2]

Funds:

Funds are created by pooling money from different investors and these pooled funds are then invested in various investments that are managed by the investment manager. The most common types of funds are mutual funds and exchange-traded funds (ETFs). Mutual funds are not traded on stock exchanges and are valued at the end of a trading day. However, ETFs are traded on stock exchanges like stocks and are valued continuously on a trading day. [2]

Investment Trusts:

Trusts are another type of pooled investment. Real Estate Investment Trusts (REITs) are the most popular types of investment trust. REITs invest in residential and commercial real estate and pay regular distributions to their investors. A major source of income for these REITs is rental income generated on properties they own. Some REITs are traded on stock exchanges and thus offer high liquidity to investors. [2]

Alternative Investments:

This type of investment captures all other forms of investments like Hedge Funds, private equity, and fine art. Hedge funds are funds that hedge their investments by going long and short on stocks and other investments. Hedge funds and private equity are generally available to professional investors who meet income and net worth requirements. [2]

Derivatives:

They are financial products that are derived from other investments such as stocks or indexes. One of the most popular derivatives are options that give the buyer the right but not the obligation to buy or sell a security at a fixed price within a certain time. Derivatives typically are traded using leverage or borrowed funds making them high-risk and high-return instruments. [2]

Commodities:

All commodities like oil, metals, grains, animal products, financial products, and currencies. They can be traded through commodity futures which is a contract to buy or sell a specified quantity of a commodity at a specified price on a future date. Commodities are traded to hedge commodity price risk or for speculation. [2]